A Start Up Trek – the Financials Game

I am starting a new public accessible prototyping lab in Huntsville, Alabama, called MindGear Labs based on the fab lab model. I’ve dreamed of becoming an entrepreneur and have done a fair amount of research on the topic. But this is my first attempt at starting a business. Here is where I document weekly my mistakes and successes in creating a business from scratch.

Creating a start up is a lot like a video game. Well, not really, but strangely I found developing my financial projections pretty fun. I guess not many people have had that particular observation. Trying to figure out how to efficiently operate this business is an exercise in optimization, not unlike the strategy games I’ve been enthralled with all my life.

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To be sure, not everything about calculating financials was fun and games. I created some simple spreadsheets a while ago when I was first considering if this would be a viable idea. They read like a spreadsheet created on the fly – disorganized, convoluted and with unfounded assumptions everywhere. I also didn’t know much about accounting practices, so my spreadsheet was more about estimating how many people would come in the door, how much revenue I could expect to receive from each customer, and some cursory estimates of expenses. Fortunately I stumbled on the free downloadable spreadsheets from SCORE and the Small Business Administration (SBA). I incorporated my estimates and all of their sheets into one master spreadsheet and linked the heck out of the entire workbook. The SCORE sheets helped me figure out which assumptions I needed to break into more detail, and they guided me on where I could find better information. So after a bunch of phone calls I was armed with reasonable estimates on payroll taxes, advertising rates, overhead expenses, material costs, equipment costs, legal and accounting fees, etc.

With the administrative stuff out of the way I was then able to play Start-up Financials, the game. Now this game is severely lacking in graphics; the console crowd would be appalled. But it made up for it in tension, short of connecting electric probes to my USB port the consequences of failure are quite real. So there is an ever present second guessing of every value in my spreadsheet.

I can make MindGear profitable on paper by assuming hordes of customers or outrageous prices but that likely isn’t going to happen in real life. However, those two assumptions, number of customers and pricing of services, are my joystick and controls. My mission isn’t to make a huge profit, but simply to figure out what it will take to survive. Seems less fun than making millions, but even great businesses fail because they can’t survive long enough to rake in the profits from their wonderful ideas and products. Business management books state over and over again that cash flow is the lifeblood of a business. I read that and thought I understood it before, but really get it now that I’ve played the game.

Of course every good game needs an enemy. I don’t really have a lot of competitors in this field so my enemies are my costs. And are there a bunch of them. Reading through the SCORE spreadsheets was an eye opener. The first time I read them I muttered over and over again, “Wow, I have to pay for that too?” under my breath. And then I had to curb the spending on the things I did know about. Beating down expenses is particularly difficult when you’re trying to envision a dream. I want my lab to have the best equipment, the most powerful computers, the most comfortable furniture, and little chocolates on everyone’s soldering iron. I can do that too, for about six months and then I’ll shutter the doors forever.

In every good game there is a level that you just can’t get past without trying over and over again. (Serious gamers that never get stuck can laugh at me here.) With MindGear my problem was with depreciation. For the uninitiated, depreciation is the loss in value of your equipment over time and by use. Since MindGear revolves around providing access to fab lab equipment for money, this is a particular concept I need to get right. For many businesses, depreciation is the dial people turn at the end of the year to modify how much corporate income tax they will declare. That is a different sort of game, and one I really don’t want to play. But in my case I could show revenue coming in and keep a positive cash flow without too aggressive assumptions on number of customers or my price schedule. But when I included depreciation my financials would look very sad. I eventually had to pull out the cheat codes (i.e. consult with an accountant) who told me my depreciation rates were overly conservative. Well, I’m an engineer, we’re taught conservative starting at Intro to Engineering. We’re also taught that the accountants are the ones that keep up from having the best toys at work. Now I know why.

At the end I produced a good enough score on my game to continue to want to see it play out in real life. And like every good game, I keep returning to it to see if I can improve the score. In the end though, my results are based on number of customers and price schedule. I’ve set the latter, now I’ll just have to see if my assumptions on the former prove true.

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